Memorandum submitted by the Association
of British Insurers (ABI)
1. It is too early to assess the impact
of the Financial Services Action Plan (FSAP) on EU financial services
markets. But our preliminary assessment is that it is likely to
have relatively little positive effect on the retail markets,
while the process of implementation may reveal significant additional
2. We welcome the European Commission's
thorough consultation on follow-up to the FSAP, and support the
findings of the Commission's Insurance and Pensions Expert group.
While the FSAP itself will soon be complete, the Commission has
tabled several additional legislative proposals, and it is important
that these should be got right. Beyond these, and some limited
additional pressing issues, the main requirement at present is
for a legislative pause, allowing national authorities to implement
the FSAP measures, and business and consumers to digest the implications.
3. During such a pause, we hope that the
Commission will take the lead in using its powers to maximise
the opportunities afforded by existing EU legislation. The Commission
will need to work in tandem with the Lamfalussy regulatory committees
and national regulators to ensure consistent implementation of
the FSAP, and to encourage convergence of national supervisory
practice. This would do more to further a genuine single market
in financial services than a raft of new legislative proposals.
The ABI's members are committed to meeting their obligations under
the FSAP, and to playing a full and constructive part in its implementation.
4. The Association of British Insurers (ABI)
is the trade body for insurance companies operating in the United
Kingdom. ABI has 390 members who provide approximately 95% of
the insurance business written by companies in the UK, and are
responsible for over 17% of the investments on the London Stock
Exchange. ABI is grateful for the opportunity to provide views
to the Select Committee on the review of the EU Financial Services
Action Plan (FSAP).
5. The FSAP was launched by the European
Commission in April 2000, following endorsement by the March 2000
Lisbon European Council. The FSAP contains 42 legislative measures,
designed to further the completion of the Single Market in financial
services. By April 2004, the EU institutions had adopted 38 out
of the 42 measures.
6. To review progress on the FSAP, and to
decide on follow-up action, the Commission established in November
2003 four expert groups of industry representatives. ABI was represented
on the Insurance and Pensions expert group by Stephen Sklaroff,
Deputy Director-General. The reports of the four expert groups
were published for consultation in May 2004. In June 2004, the
Commission held a Conference in Brussels to discuss the results.
The consultation period ends in September 2004. Over the autumn,
Commission staff will reflect on the responses, and make proposals
to Commissioner McCreevy. Current expectations are that he will
announce his plans early in 2005.
7. Agreement on the FSAP's legislative measures
in such a short time represents a considerable bureaucratic achievement
by the Commission, the Parliament and member states' Governments.
But it is far too early properly to assess the impact of the FSAP
on EU financial services markets. The Lamfalussy committees
have only just started working on the secondary legislation. Most
FSAP measures have yet to be transposed into national legislation.
And we have not begun to see how the market, and consumers will
respond to these changes in the legislative framework.
8. As the ABI has made clear to the Commission,
British insurers' initial analysis suggests that the FSAP measures
will create few genuine new business opportunities, at least for
EU retail insurance markets. On the other hand, there appear likely
to be significant new costs, mainly as a result of overlapping,
and sometimes contradictory, regulatory requirements.
9. This is a sobering reflection, as the
FSAP was launched with the best of intentions on all sides. What
went wrong? First, all parties were perhaps guilty of loading
the FSAP with unrealistic expectations. With hindsight, this body
of legislative measures could only have represented a small step
towards the creation of a genuine Single Market in financial services.
Secondly, some of the proposals were not thoroughly thought through,
and the Commission might with advantage have given greater consideration
to some of them prior to introduction. Thirdly, some member states
backed away from the consequences of market-opening legislation
in the course of negotiation, thereby adding to regulatory barriers.
In considering the next steps on financial services regulation
at EU level, pragmatic conclusions should be drawn from this experience.
These conclusions are well set out in the reports of the Commission's
four expert groups.
EU IN FINANCIAL
10. The regulatory goal for the FSAP was
the creation of a truly integrated Single Market for financial
services. The Commission paid particular attention to encouraging
cross-border trade. At the macro-economic level, there are well-documented
benefits in an integrated market in financial services, and this
is therefore a legitimate regulatory goal for the wholesale capital
markets. However, regulatory objectives need to recognise that
integration may take a different form in retail markets, and particularly
in retail insurance, where cultural and social differences between
national markets mean that consumers are less inclined to buy
products on a cross-border basis.
11. For example, policyholders prefer to
buy insurance in their own language, and from an institution they
know they will be able to contact easily in the unfortunate event
of a claim. Local circumstances mean that policy terms often vary
considerably from place to place. From the insurer's point of
view, it is difficult to assess and price risk without a presence
in the local market. Most policyholders therefore buy their insurance
locally, and most pan-European insurers have chosen a business
model based on establishment in the local market. The industry
believes that this business model is just as capable of delivering
open and competitive markets as models assuming large volumes
of cross-border trade.
12. This is not to argue that there will
never be a significant level of cross-border trade in retail insurance.
Niche cross-border markets already exist, and over time we expect
them to grow. Our argument is rather that the EU's regulatory
objectives in retail insurance should not be predicated on market
conditions which are as yet some way off, and in some sectors
may never arise. We see a real risk that further legislation designed
solely to promote cross-border trade would add to costs without
creating opportunities for business, or increasing choice for
13. Although the FSAP is more or less complete,
the European Commission already has a heavy schedule of further
legislation in hand, with significant implications for the insurance
industry. The Reinsurance Directive will set prudential requirements
and provide a single passport for reinsurers. The measures in
the Corporate Governance Action Plan will establish common principles
for corporate governance at EU level, a key factor in maintaining
confidence in Europe's capital markets. The adoption of International
Accounting Standards willif all goes wellhelp put
company accounts on a similar footing internationally. The most
significant project for insurers is Solvency II, which will re-write
the rules for the calculation of prudential solvency margins for
insurers, based on a realistic assessment of risk.
14. These measures will lead to significant
changes in the regulatory framework for insurance. And a successful
outcome cannot be taken for granted: constant vigilance will be
needed by the Commission to retain the market-opening thrust of
these proposals. Nonetheless, the ABI supports all these measures,
and is actively lobbying to get them right. The immediate priority
for the Commission has to be the successful completion of these
measures, already in the legislative pipeline.
A LEGISLATIVE MORATORIUM
15. The chart by the Comité Européen
des Assurances (CEA) at Annex A shows the recent, almost exponential
increase in EU regulatory measures affecting the insurance industry.
As the Expert Group on Insurance and Pensions recommended in its
report, the insurance industry is now in need of a legislative
pause to digest the legislative changes already in the pipeline.
"[a pause] will also provide a breathing space for industry
dynamics to reshape the market and leverage the opportunities
currently opening up in the new EU-wide and international markets."
The insurance industry is suffering from regulatory fatigue, and
we are concerned that legislative overload, at national or at
EU level, will cause internationally mobile business to leak away
to other international finance centres.
16. We see a crucial role for the Commission
in ensuring that the existing legislative programme is brought
to a satisfactory conclusion. The Commission must also take a
lead, co-operating with national authorities and the Lamfalussy
Committees, in ensuring consistent implementation and enforcement
of the existing legislative framework across the EU. In particular:
the technical measures necessary
to implement the FSAP need to be produced without adding to the
regulatory burden, or to regulatory barriers;
co-operation between national supervisors
needs to be improved, leading to the designation of "lead"
supervisors for multinational groups;
the Commission should police more
aggressively national implementation of the basic framework of
the Life and Non-life Directives (which set much of the current
framework for insurance business in the EU). Member states have
abused the "general good" clauses in these Directives
which permit the imposition of extra conduct of business rules.
This is a major barrier to cross-border trade, and some of the
worst examples should be challenged in the ECJ;
Non-legislative measures should be
developed to increase consumer confidence, building on existing
complaint networks FIN-NET and SOLVIT; and
the Commission should where appropriate
make more use of its competition powers to open marketsthough
these are of limited value in a heavily regulated field.
17. Carrying out this work thoroughly, in
addition to concluding the current raft of legislation already
on the table, represents a major task for the Commission. By taking
on this role during a legislative pause of the kind proposed,
the Commission could make a huge step towards a genuine single
EU retail financial services market.
EU MEASURES IN
18. In the past, the Financial Services
Authority has sometimes been too willing to "gold plate"
EU legislation. This can happen for understandable reasons, as,
in each individual case, there may be a good reason for going
beyond EU legislation. Indeed, in some cases it is necessary to
do so to ensure a genuinely level playing field. However, the
avoidance of unnecessary gold-plating is essential if significant
increases in UK regulatory burdens are to be avoided.
19. The London international insurance market,
which is the leading global market for large and high-risk insurance,
is also very worried by the UK'sperhaps understandabletendency
to implement EU Directives more quickly, and in a more thoroughgoing
(and hence burdensome) manner, than is the custom in many large
Continental markets. While perhaps not technically falling under
the heading of gold-plating, the result is the same: internationally
mobile insurance capital is increasingly likely to move elsewhere.
20. The ABI therefore welcomes the approach
to implementation of EU legislation set out in the FSA/Treasury/Bank
of England report Delivering the FSAP in the UK. The implementation
timelines in the report set out very clearly the scale of the
task facing both regulatory authorities and the financial services
industry over the next two years. In particular, we welcome:
The objective of providing three
months of regulatory certainty before business is required to
operate the new rules.
The commitment to thorough consultation
with industry interests.
The systematic production of Regulatory
The presumption against gold-plating.
The commitment to co-operate with
other member states' authorities.
The account to be taken of the impact
on the competitiveness of British business.
The development and publication of
21. These commitments, if implemented, would
put the financial services industry on a better footing for the
transposition task ahead.
FUTURE EU LEVEL
22. We have called for a regulatory pause.
However, it would be unhealthy for the legislative framework to
be set in stone. It will in due course need to be updated to take
account of developments in the market. ABI encourage the Commission
to adopt a more deliberate approach to legislation than was possible
at the launch of the FSAP.
23. ABI agrees with the report of the Financial
Services Committee (Report on Financial Integration) that
the first step, before considering the appropriate level of policy
response, is thorough analysis of the market in question. It is
not sufficient to rely on high level market integration theory,
as a cost/benefit analysis will need to demonstrate benefits at
the level of the individual markets. For example, as we have said
earlier, the wholesale insurance market will need to be considered
separately from the retail market.
24. Market analysis will show whether there
is prima facie a market failure. In considering the policy
response to market failure, the Commission should give preference
where possible to non-legislative solutions.
25. Any legislative proposals at EU level
should be subject to thorough consultation, especially among market
participants, and rigorous cost/benefit analysis, in accordance
with the Commission's Better Regulation Action Plan.
26. Finally, Europe's regulators should
bear in mind the international competitiveness of European insurers,
and the attractiveness of Europe's financial centres as places
to do business.
1 In 2000 a Committee of Wise Men (chaired by Baron
Lamfalussy) was appointed to recommend a new decision-making procedure
for the adoption of EU legislation affecting the securities markets.
The central principle is that primary legislation at EU level
should be restricted to establishing the legislative framework.
A committee of national regulators (Committee of European Securities
Regulators, CESR) was established to work up technical implementing
measures in secondary legislation. Extended to banking, insurance
and conglomerates legislation in 2002, the Lamfalussy process
is designed to improve the quality and effectiveness of EU financial
services legislation. Back
Report by Expert Group on Insurance and Pensions, published in
May 2004. Back